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Edited version of your written advice

Authorisation Number: 1012710419282

Ruling

Subject: CGT - Small business concessions - active asset test

Question

Are your rental properties able to be considered active assets for the purposes of the small business capital gains tax (CGT) concessions?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You refurbished and sold rental property in 20XX.

The proceeds from the sale of this property, was used to purchase another property a few months later.

You started your business by buying a property, and gradually adding more properties to your portfolio over time, in order to grow your business and increase its asset base. You have gradually sold and purchased more properties over the years.

You have been working to grow your real estate business by increasing your asset holdings. You do this by selling for profit when the market dictates, and then reinvesting the funds in the business.

You employed a number of estate agents in different localities this year to collect your rents, this is the only part of the business function that you aren't involved in.

You manage your own properties, employ trades when necessary and take a, hands on approach, attending to most of the maintenance yourself. You play an active role in refurbishing the properties and running your business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35 ,

Income Tax Assessment Act 1997 Subsection 152-40 ,

Income Tax Assessment Act 1997 Subsection 152-40(1) and

Income Tax Assessment Act 1997 Paragraph 152-40(4)(e) .

Reasons for decision

To access the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity must first satisfy the basic conditions in section 152-10 of the ITAA 1997.

One of the basic conditions requires the relevant CGT asset to satisfy the active asset test in section 152-35 of the ITAA 1997. The meaning of an active asset is provided in subsection 152-40(1) of the ITAA 1997, which states:

Certain assets are, however, excluded from being active assets under subsection 152-40(4) of the ITAA 1997. An asset whose main use is to derive rent (unless such use was only temporary) is excluded from being an active asset. Such assets are excluded even if they are used in the course of carrying on a business.

Example 1 in Taxation Determination TD 2006/78 deals with commercial rental properties:

The Advanced guide to capital gains tax concessions for small business 2012-13 (NAT 3359) states that the term 'rent' has been described as referring to the payments made by a tenant or lessee to a landlord or lessor for exclusive possession of the leased premises. As such, a key factor in determining whether an occupant of premises is a lessee paying rent is whether the occupier has a right to exclusive possession.

If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises are not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are not likely to be rent.

The Advanced Guide gives the following example:

In your case, you are carrying on a business of residential property investment, investing, refurbishing, maintaining and renting out your properties. This situation is similar to the above examples. Whilst it is appreciated that you have made considered and educated decisions in the investments and maintenance of the properties, the fact remains that your tenants have right to exclusive possession for the term of their lease, therefore it is considered that the main or only use of the properties is to derive rent. Therefore, the properties are excluded from being active assets under paragraph 152-40(4)(e). This is regardless of the fact that your activities amount to the carrying on of a business.

Accordingly, as the properties cannot pass the active asset test under section 152-35 of the ITAA 1997, you will not be able to access any of the small business CGT concessions in relation to the sale of your properties.


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